If you believe the warning knells of those bearish on the
venture capital market, that loud sucking noise you've been
hearing is the sound of a deep pool of large institutional investor
cash being drained dry.

An exaggeration, perhaps, but not entirely off the mark. While
second quarter 2000 saw continuing record levels of VC investment,
third-quarter numbers showed signs of leveling off, with VCs
complaining that institutional investors have grown stingier. A
survey from the National Venture Capital Association (NVCA) reports
some VCs saying they've been investing in early-stage companies
less aggressively since last April's sell-off that ravaged the
tech sector.

The result? "Returns on the VC side, previously
stratospheric, may settle down to realistic," says Miles
Spencer, president of Norwalk, Connecticut-based media company
MoneyHunt Properties. It's a dose of realism giving
institutional investors used to 100 percent-plus returns pause for
thought. With dozens of vanity firms, incubators, accelerators and
virtual angels angling for cash, investors can afford to be
selective-which could lead to a considerable shakeout.

But Darwinian natural selection among VC firms doesn't
necessarily mean fewer institutional dollars. NVCA president Mark
Heesen says some institutions have invested so much, they've
reached their legally permissible limits. "But as they get
money back from the venture funds, I'd be surprised if they
didn't return it to the venture process," says Heesen.
Meanwhile, as pension funds max out, corporations and individuals
are picking up the slack. Heesen cites figures that say
professional capital firms raised $30 billion in the first half of
2000, compared with $51 billion for all of 1999 and $27 billion in
1998 as proof that appetite remains strong.

Still, as more established funds raise record levels of cash,
smaller funds are getting pinched, says Heesen, which could mean
more time on the road for entrepreneurs pitching to investors.
"But while it will take longer," he says, "most
funds will reach their goals."

For now, anyway. A marked decline in VC investing would cut back
on financing options. "And, as we say, one bidder makes a
short auction," says Spencer. Valuations will have to come
down. "Things will be more competitive," he says. "A
return to realism, one might say."

C.J. Prince is a New York City writer who specializes in
business topics and the executive editor of Chief Executive
magazine.